Wells Fargo & Co. and U.S. Bancorp are dropping their deposit advance products, payday-like loans with annual percentage rates over 200 percent, bowing to pressure from bank regulators and criticism from consumer advocates that the loans are a debt trap.
The two banks are by far the largest of the small clique of U.S. banks that make the high-cost loans, and their announcements Friday signal a change blowing across the country’s multibillion-dollar payday loan industry. Just two days ago Regions Bank in Birmingham, Ala., said it was getting out of the quickie payday business, and Cincinnati’s Fifth Third Bank also nixed the loans on Friday.
The typical loan is a 12-day advance on a direct deposit paycheck, with the loan carrying an annual percentage rate of 225 to 300 percent, the Center for Responsible Lending said.
U.S. Bank, headquartered in Minneapolis, said it’s considering products to address the clear need for short-term small-dollar credit, but Wells Fargo said it is not at this time.
“We are committed to finding new solutions that meet the needs of all of our customers and fit within the current regulatory expectations,” Kent Stone, vice chairman of consumer banking sales and support at U.S. Bank, said in a news release.
The banks have tried to distance themselves from the traditional payday loan industry with its gritty storefront image. But in November, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corp. (FDIC) issued unusually strong guidance on the bank deposit advances, slamming them as payday loans that pose “significant safety and soundness and consumer protection risks.” Banks have to make loans consumers can afford to repay, they said.
At least two other banks make the pricey advances: Bank of Oklahoma and Guaranty Bank, the Center for Responsible Lending said.
Wells Fargo said that starting Feb. 1, new consumer checking accounts won’t be eligible for its Direct Deposit Advance service. It will continue the service for customers using it until midyear.
U.S. Bank said that it will stop offering its Checking Account Advice service to new checking account customers starting Jan. 31, but will continue it for current customers until May 30.
Consumer advocates called the retreat a victory for consumers.
“It eliminates the fundamental problem of the loan churning and repeat borrowing,” said Ron Elwood, supervising attorney at the Legal Services Advocacy Project in St. Paul. The OCC and FDIC “zeroed right in on the problems,” he said.
Elwood praised U.S. Bank for committing to finding more responsible short-term emergency loans.
Frank Rauscher, senior principal at Aquinas Associates, an investment consulting firm in Dallas that specializes in socially conscious investing, called the deposit advances “a little Frankenstein product.”
Rauscher said he wrote letters to Wells Fargo, U.S. Bank and Regions for about a year asking them to end the loans, and then went to bank regulators about his concerns.
“They were earning over 1,000 percent return on equity, after tax,” he said. “We’re sad that they couldn’t recognize how to make it a responsible product.”
Richard Hunt, head of the Consumer Bankers Association, issued a statement saying the disappearance of the products will hurt consumers: “Forcing banks out of this business limits options for consumers and pushes them toward payday lenders and fly-by-night entities.”
Wells Fargo and U.S. Bank still have a hand in the payday industry, in an area regulators have not as clearly addressed. They are major sources of capital for high-cost consumer finance lenders such as Cash America, Advance America and EZCorp.
The two banks together have lent more than $1 billion since 2005 to a range of consumer finance lenders, according to the recent report Connecting the Dots, by Adam Rust at the consumer advocacy Reinvestment Partners in Durham, N.C.
Rust said some of the banks are re-evaluating those commercial loans.